Netflix Mulls Price Tiering as Subscriber Numbers Soar

Netflix capped a strong 2013 this afternoon when it announced impressive results for the fourth quarter. The company added 2.3 million new U.S. subscribers between October and December — the largest gain of any quarter last year and on the very high end of the company’s own projections. Another 1.74 million people signed on internationally, also the biggest gain of the year. For 2013 overall, the company added more than 11 million new subscribers globally in 2013 for a total of 44 million customers. The company also posted a net income of $48 million, the largest figure since 2011. Shares of Netflix jumped 14% in after-hours trading based on the strong-earnings report.

Netflix’s quick growth has come during an aggressive push into bankrolling original content. In addition to current hits like House of Cards and Orange Is the New Black, the company has begun rolling out a new slate of cartoons from DreamWorks Animation and recently inked a deal for series of live-action superhero shows from Marvel. The company is also promoting and exclusively distributing The Square, a documentary about civil unrest in Egypt that was recently nominated for an Oscar.

The next phase of the company’s growth plan is significant international expansion. In a letter to shareholders, CEO Reed Hastings said the company is prepping a “substantial” expansion in European markets. The company will likely target France or Germany, where it’s not currently available.

Hastings has said that the company one day hopes to have 60 million to 90 million U.S. subscribers, doubling or tripling its current figure. However, large obstacles remain to reach that number. Last week’s court ruling striking down net-neutrality rules could be used by Internet service providers to charge Netflix higher rates for the use of their pipes. Such fees could cost as much as $100 million per year, according to an analyst at Stifel Nicolaus. In a conference call with investors, Hastings said he doubted ISPs would use the new rules to throttle Netflix because it would anger their customers. “In the short term, it’s very likely that there’s no change,” he said.

Even if net-neutrality issues don’t affect Netflix, the company will face mounting pressure to increase its $7.99-per-month base subscription fee as licensing and production costs increase. In its shareholder letter, the company acknowledged that it plans to expand the tiered pricing structure it has been testing in the last year. Last spring Netflix introduced an $11.99-per month plan that allows families to stream content on four devices simultaneously. Another new plan, currently being tested with a limited group, aims to rope in new subscribers by offering standard-definition streaming on a single device for $6.99 per month. Other variations have also been tested.

“It’s not clear that one price fits all,” Hastings said, shifting from his earlier rhetoric that simplicity in pricing was key. “We’re trying to figure out some models of good, better, best price tiering that make sense.” He emphasized that these plans are primarily aimed at new subscribers and that current members would receive “generous grandfathering ” terms if prices change.